# September-October - The Math Edition

 The Math Edition For buyers, renters, investors
 Am I better off buying a lower-priced or a higher-priced property? Should I buy or rent? What if the investor sells after 5 years? Romancing the high-end market The moral of the story Real data, without the spin News highlights

# Am I better off buying a lower-priced or a higher-priced property?

Sarah is a first-time buyer (saves big on land transfer tax) with \$100,000 available in personal savings and family support. She can buy a condo up to \$400,000 with 20% down and a conventional mortgage. That 80% mortgage means not having to pay \$5,000-7,000 for CMHC insurance.

She thinks three areas would work well for her for different reasons: downtown Toronto, uptown Toronto at Yonge & Finch, and central Markham at Highway 7 and Leslie/Bayview. A search at the lower end of the price range in each of these areas  turns up excellent candidates under \$400,000 (the high end is into 7 figures!).

In order to compare apples with apples, the contenders are similar-sized 1-bedroom units at 600-699 sq. ft. on the 5th floor or higher, have 1 parking and 1 locker, and feature similar amenities. A 5-year view is compared, reflecting the common “not-for-the-long-term” and the flexibility to sell and move, or invest and sell.

Highway 7, central Markham, Suncrest Blvd

Estimated purchase price, based on 2013 sales: \$243,875

20% downpayment: \$48,775

Mortgage: \$195,100

Monthly carrying cost: \$1,510 (mortgage, maintenance, property taxes)

One-time purchase costs: \$1,782 (land transfer tax, transaction fees, title insurance)

Cash outlay: \$50,557 (downpayment + one-time costs)

After 5 years, assuming 2% annual appreciation

Market value: \$269,258

Remaining mortgage: \$169,544

Owner’s equity: \$99,714

Minus cash outlay: \$50,557

Gain in asset value/Net worth: \$49,157

% gain on cash outlay: 97%

Annual compound ROI (return on investment): 14.5%

Yonge & Finch, Byng Ave

Estimated purchase price, based on 2013 sales: \$298,000

20% downpayment: \$59,600

Mortgage: \$238,400

Monthly carrying cost: \$1,845 (mortgage, maintenance, property taxes)

One-time purchase costs: \$2,563 (land transfer tax, transaction fees, title insurance)

Cash outlay: \$62,163 (downpayment + one-time costs)

After 5 years, assuming 2% annual appreciation

Market value: \$329,016

Remaining mortgage: \$207,173

Owner’s equity: \$121,843

Minus cash outlay: \$62,163

Gain in asset value/Net worth: \$59,680

% gain on cash outlay: 96%

Annual compound ROI: 14.4%

Downtown Toronto, 16 Yonge St.

Estimated purchase price, based on 2013 sales: \$395,000

20% downpayment: \$79,000

Mortgage: \$316,000

Monthly carrying cost: \$2,245 (mortgage, maintenance, property taxes)

One-time purchase costs: \$4,018 (land transfer tax, transaction fees, title insurance)

Cash outlay: \$83,018 (downpayment + one-time costs)

After 5 years, assuming 2% annual appreciation

Market value: \$436,112

Remaining mortgage: \$274,609

Owner’s equity: \$161,503

Minus cash outlay: \$83,018

Gain in asset value/Net worth: \$78,485

% gain on cash outlay: 95%

Annual compound ROI (return on investment): 14.2%

The math lesson

If, like Sarah, you’ve got the cash and qualifying earnings and you choose wisely, you can buy what you love from \$244,000 to \$395,000 and have the same healthy return on investment after 5 years. For some buyers, the lower end is what they can afford. Some buyers will stick with the lower end because they want to invest their remaining cash differently. Other buyers may see putting in extra cash and payments as a good investment with lower risk than alternatives such as equity mutual funds or syndicated second mortgages.

The underlying assumption to this three-good-choices scenario is that the condo market stays in fair shape with modest rises in market value and mortgage rates. If the market value were to be unchanged 5 years later the paydown of the mortgage would still generate about half the net gain in assets/net worth at half the ROI.

Jacob has the resources to buy Byng Ave. He sees living there for 5 years then selling and buying a house. Should he buy it, or rent a similar unit in the building?

Let’s be middle-of-the-road on the housing forecast and say that over the next 5 years there is neither a continuing housing boom nor the feared bust, and prices rise very modestly for a total gain of 5% over 5 years. The rental amount shown is currently being paid for similar units in the same building.

To buy for \$298,000 with a 20% downpayment and 80% mortgage, the monthly carrying cost will be \$1,845 (mortgage, maintenance, property taxes). The one-time purchase costs is \$2,563 (land transfer tax for first-time owner, transaction fees, title insurance), for a total cash outlay of \$62,163 (downpayment + one-time costs).

To sell: At 5% total appreciation over 5 yrs the market value would be \$312,900. Minus the remaining mortgage of \$207,173, the cash outlay of \$62,163, 4% realtor’s commission, and typical legal fees, Jacob’s net gain would be \$28,231.

To rent: At \$1,600 / month Jacob saves \$245 each month. If he earns 5% compounded annually on the monthly savings, he will have \$16,614 at the end of 5 years.

The math lesson

Assuming increases in ownership costs (maintenance, property taxes, repairs) and increases in rent over the 5 years are roughly equivalent, Jacob is ahead by buying. While the financial advantage of buying is not huge and is not guaranteed, the deciding factor could be that he can live there on his own terms for as long as he chooses.

How do I choose an investment property?

There are too many variables to cover in a short newsletter without on-line calculators and a live spreadsheet. However, there is an important lesson in just comparing two of the above properties, Byng Ave and Yonge St.

Which is the better choice for the investor? In this scenario, we’ll assume that the condo market comes in for a soft landing of 0-1.5% annual appreciation adding up to 5% total gain over 5 years.

Yonge & Finch, Byng Ave

Purchase price: \$298,000

Monthly carrying cost: \$1,845 (20% downpayment, 80% mortgage)

Rent: \$1,600

Excess ownership carrying cost: \$245

5 yr opportunity cost @ 5%: \$16,614 (what \$245 invested monthly compounded annually would be worth)

At 5% total appreciation over 5 yrs

Market value: \$312,900

Minus remaining mortgage: \$207,173

Owner’s equity: \$105,727

Minus cash outlay: \$62,163

Gain in asset value: \$43,564

Minus opportunity cost: \$16,614

Net gain: \$26,950

% gain on cash outlay: 43%

Annual compound ROI: 7.47%

Downtown Toronto, Yonge St

Purchase price: \$ 395,000

Monthly carrying costs: \$2,245 (20% downpayment, 80% mortgage)

Rent: \$1,700

Excess ownership carrying costs: \$545

5 yr opportunity cost @ 5%: \$32,715 (what \$545 invested monthly compounded annually would be worth)

At 5% total appreciation over 5 yrs

Market value: \$414,750

Minus remaining mortgage: \$274,609

Owner’s equity: \$140,141

Minus cash outlay: \$83,018

Gain in asset value: \$57,123

Minus opportunity cost: \$32,715

Net gain: \$24,408

% gain on cash outlay: 29%

Annual compound ROI: 5.29%

The math lesson

The ROI on Byng Ave is 40% higher than on Yonge St. Many investment properties will generate a return. To find the best return for your money, you should partner with a realtor who can do the research and the math. You might discover that two low-priced properties will give you a better return than one high-priced property. See Romancing the high-end market below.

What if the investor sells after 5 years?

Assuming 4% sales commission and typical legal fees, the ROI on Byng vs. Yonge St would be 3.5% vs. 1.1%. The investor in Byng Ave does 50% better than a 5-year GIC. The investor in Yonge St earns below record-low consumer inflation.

Romancing the high-end market

A friend, now a client, and her family bought a fabulous 3-bedroom 3-bath townhome in Concord City Place. The final tally: \$800,000, cash.

The property is zoned work/live. Half of these City Place street-facing 2-storey townhomes are in fact storefronts at street level, with a residence above. For some business operators, it’s the ultimate in convenience plus substantial savings over renting separate commercial space.

We found a residence-only tenant at \$3,500. Other same-size townhomes were leased in 2013 for \$3,150–\$3,200 and a larger unit rented for \$3,400, so high-fives all-around.

How will this townhome fare as an investment over 5 years?

First, the market value in 5 years is not likely to be more than \$800,000. Great concept, but high for the area, and a lot of competition for the money in trendy downtown areas. More telling, an identical unit has been on the market for \$699,000 the past 2 months – no takers.

Assuming 3 tenancies, 3 realtor fees, 2 vacant months, some repair and restore costs, and the expected increases in the current maintenance of \$875 (especially for new developments!) and property taxes of \$4,500, the total NET income over 5 years will be around \$121,000. On \$800,000 that’s a return of 3% compounded annually.

The math lesson

A conservative diversified investment portfolio would yield around 6%, or \$243,000. So with this purchase the family is on track to forgo \$122,000 of income. Ouch!

An alternative: the family could have bought three Markham or two Toronto condos. The total ROI on invested cash would have been similar to Fort York but with a higher probability of increased property values.

The moral of the story

There is a whole generation of owners sitting on giant nest eggs, and a new generation of owners sitting on giant debts. At the prices new owners are paying, the payoff for their sacrifices rests heavily on continuing low mortgage rates and high economic hopes. Most renters are saving money but not feeling good about it. Most individual investors believe they are doing better than they really are, so are feeling pretty good about it.

If your goal with real estate is to gain quality of life and net worth, go ahead and fall in love. But choose wisely, and do the math before you commit.

Charles Young

Real Estate Sales Representative

www.charlesyoungrealestate.com

call or text: 416 436-5851

email: charles@charlesyoung.ca

P.S. Watch for the launch of my real-life.ca website with expanded coverage to learn more, live better.

# Real data, without the spin

In each newsletter I show the rolling 13-month median selling prices for defined categories of condos and houses in 6 areas. These charts provide a local view that is buried in the industry’s broad all-in averages.

I also show the Teranet-National Bank House Price Index for Toronto (GTA). This index is the equivalent of the highly respected and much quoted Case-Shiller Index in the US. It helps to filter out the considerable noise in the Canadian real estate market. The Teranet-National Bank Index encompasses all housing forms (condos, townhouses, semis, detached).

Note the flatline from August to September, contrary to the impression you might get from industry press releases.

Monthly sales in the two Toronto areas have been in the 25-30 units range most of the year and in the 15-20 range in Markham. Only the Lakefront is showing a clear positive price trend. At the same time, it could be or become the most overbuilt.

Richmond Hill jumped in September on the fewest sales (13) since May. It will take a few months with higher sales numbers to establish a price trend.